With the number of exchange traded products continually growing (globally, there are now more than 4700 ETPs and counting), an interesting debate has arisen about whether investors should gain access to international equity markets through a fund that tracks a broad benchmark or through more granular regional or country exposures. Typically choice is a positive thing, but it’s understandable that the size and scope of the ETP market can add a layer of complexity to an investor’s selection process.
As usual, there is no one right answer, as the choice should be driven by whether or not an investor believes he or she can distinguish between different exposures, like countries or sectors. That said, investors with views on specific regions could certainly consider a more granular implementation, particularly given the recent divergences we’re witnessing in global equity markets.
For most of the past four years, the world has lived in a risk-on/risk-off environment, with investors’ changes in risk tolerance setting prices. While the underlying sources of volatility are unlikely to abate, we are already starting to see more differentiation in performance between different countries and regions. For example, the United States has been a clear winner in 2012, while much of Europe has struggled.
Even within regions, we have seen significant divergences. Europe’s overall performance has masked significant differences between the south and the north. Germany has had a stellar year, while southern Europe has, up until recently, struggled. Similarly, we have witnessed significant differences in emerging market performance, particularly compared to the more homogenous returns of the last several years.